H.B. Fuller Company — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 3, 2016; the 2016 fiscal year contained 53 weeks. Comparisons are primarily with fiscal 2015, ended November 28, 2015. Amounts are in U.S. dollars.
Business context and reporting period
H.B. Fuller formulates, manufactures and sells adhesives, sealants and specialty chemicals in 38 countries. Its five reportable segments are Americas Adhesives, EIMEA, Asia Pacific, Construction Products and Engineering Adhesives. Industrial adhesives are the core business. The company acquired Advanced Adhesives for approximately $10.4 million and Cyberbond for approximately $42.5 million during 2016, using existing cash.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net revenue | $2,094.6 million | $2,083.7 million | +0.5% |
| Gross profit | $609.8 million | $568.0 million | +7.4% |
| Gross margin | 29.1% | 27.3% | +1.8 percentage points |
| Income from continuing operations | $124.4 million | $88.4 million | +40.7% |
| Net income attributable to H.B. Fuller | $124.1 million | $86.7 million | +43.2% |
| Diluted EPS from continuing operations | $2.42 | $1.71 | +$0.71 |
| Operating cash flow from continuing operations | $195.7 million | $210.5 million | Down $14.8 million |
| Free cash flow | $104.9 million | $126.2 million | Down $21.3 million |
Revenue growth reflected volume growth of 3.9%, offset by lower pricing of 1.6% and an unfavorable currency impact of 1.8%. The extra fiscal week increased revenue and costs by approximately 2%. Lower raw-material costs were the main driver of the 180-basis-point gross-margin improvement. SG&A rose 2.5% to $407.6 million, or 19.5% of revenue.
Fourth quarter: Revenue was $574.9 million versus $548.1 million in Q4 2015; income from continuing operations was $39.2 million versus $25.1 million; diluted EPS was $0.76 versus $0.49.
Segment highlights: Engineering Adhesives revenue increased 22.7% and segment operating income rose to $17.4 million from $0.9 million, supported by Tonsan and Cyberbond. EIMEA operating income increased to $40.1 million from $15.1 million, with improved production efficiencies and lower raw-material costs. Construction Products operating income fell 76.3% to $3.3 million as revenue declined 6.0% and supply-chain costs increased. Americas Adhesives revenue declined 3.0%; operating income was $126.0 million, down 1.4%. Asia Pacific revenue rose 4.8% and operating income rose 19.0% to $15.4 million.
Liquidity, debt and capital resources
Cash and cash equivalents were $142.2 million at year-end, including $114.7 million held outside the U.S. Total debt was $705.6 million, down from $722.9 million; net financial debt was $563.4 million. The company had $300 million of undrawn revolving credit capacity, available through October 2019, and reported compliance with its debt covenants. Its debt-to-capitalization ratio was 42.9%, compared with 45.3% in 2015. Current maturities of long-term debt were $80.2 million, including senior notes maturing in fiscal 2017. Foreign subsidiary short-term borrowings carried a 13.7% weighted-average rate.
Capital expenditures were $63.3 million; acquisition spending, net of cash acquired, was $52.5 million. Dividends paid were $27.5 million and share repurchases were $23.2 million. The declared annual dividend was $0.55 per share, up from $0.51.
Outlook, commentary, risks and unusual items
- Management provided no specific FY2017 revenue or earnings guidance in the filing. It expected 2017 capital expenditures of approximately $60 million and stated operating cash flow should be adequate for ongoing liquidity and capital needs.
- A restructuring plan approved December 7, 2016 is expected to cost $17–$20 million ($13–$16 million after tax), with most costs in fiscal 2017 and completion expected by mid-2018.
- Project ONE, the global ERP rollout, had experienced manufacturing, productivity and customer-service disruption during its 2014 North America launch. Management planned to begin the next phase in Latin America in the first half of 2017, with completion expected in 2018; total project costs are expected to exceed the original $60 million estimate, with an updated estimate and schedule to follow.
- On January 27, 2017, after fiscal year-end, the company acquired substantially all assets of H.E. Wisdom & Sons and Wisdom Adhesives Southeast for approximately $122 million, funded by its revolving credit facility.
- Key exposures include raw-material costs, which exceeded 75% of cost of sales; foreign currency movements; competitive and end-market conditions; and execution and integration risks related to acquisitions, restructuring and the ERP program. A hypothetical 1% change in raw-material costs was estimated to affect net income by approximately $7.7 million.
- The company recorded a $0.8 million goodwill impairment for the EIMEA Construction reporting unit. It reported $9.5 million of currency transaction and remeasurement losses in 2016. Management assessed pending litigation and environmental matters as not expected to have a material overall effect, while noting future settlements could affect results or cash flows. Environmental compliance spending over the next two years was estimated at $11.5 million, including $1.9 million of capital expenditures.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls and stated that the previously disclosed material weakness in Tonsan acquisition accounting had been remediated.
Important facts for investors to verify
- Whether gross-margin gains from lower raw-material costs can persist, and whether pricing and input-cost movements could reverse them.
- Whether underlying segment trends improve, particularly the sharp 2016 decline in Construction Products profitability and weakness in Americas Adhesives.
- The revised Project ONE budget, implementation timetable and evidence that future rollout phases avoid material operating disruption.
- The timing and realized costs and savings of the announced restructuring, alongside integration returns from recent and subsequent acquisitions.
- Near-term debt maturities, refinancing plans and the impact of the Wisdom acquisition on leverage and covenant headroom.
- The effect of foreign currency exposure and the extent to which foreign-held cash can support U.S. needs; the filing states that $103.8 million of foreign cash was considered indefinitely reinvested.